Karachi, September 21, 2024 – Prime Minister Shehbaz Sharif has given the green light to the Federal Board of Revenue (FBR) to aggressively target Pakistan’s wealthiest citizens under a transformation plan aimed at addressing tax evasion and increasing revenue collection.
The plan focuses on the top 1% of high-net-worth individuals, comprising around 0.6 million people, who have been under-filing or null-filing their tax returns, resulting in an estimated loss of Rs1.3 trillion annually.
This initiative is part of a broader effort by the FBR to close a total tax gap of Rs7.1 trillion per year across all forms of taxation in the country. The government’s move is seen as a significant step toward reforming Pakistan’s tax system, which has long been criticized for its inefficiencies and lack of enforcement.
Targeting Wealthy Tax Evaders
The FBR has identified that individuals in the top 1% income bracket, who earn an average of Rs13.2 million annually, are responsible for under-filing their taxes to the tune of Rs1.3 trillion. These individuals collectively paid Rs499 billion in taxes, but the actual tax owed was far higher. Similarly, the top 1% to 5% of earners, with an average income of Rs2.7 million, are estimated to have evaded taxes amounting to Rs378 billion.
To combat this widespread under-filing, the FBR has proposed a series of punitive actions, which will be implemented through a mini-budget or ordinance. The measures include freezing bank accounts, banning the purchase of immovable property, vehicles, and investments in the stock market for those found guilty of evasion.
Comprehensive Tax Reform Plan
The FBR’s three-year transformation plan, with an estimated cost of Rs137 billion, aims to modernize tax collection processes. The funds for this plan will be sourced through loans from multilateral creditors, including the World Bank, which has already extended Pakistan’s revenue-raising program, and a potential new loan from the Asian Development Bank (ADB). Part of the budget will also be allocated to increasing salaries for the Super Large Taxpayer Unit (LTU) staff in Karachi, incentivizing them to perform better.
On the customs front, the plan includes installing state-of-the-art technology at 24 bridges over the Indus River to monitor and curb smuggling. Advanced surveillance tools like drone cameras will also be deployed, while low-tech check-posts will be set up in Balochistan to prevent smuggling.
Banking Restrictions and Data Sharing
To further tighten controls, the FBR has proposed that individuals with incomes above Rs10 million should be subject to additional scrutiny. A common data-sharing mechanism will be developed in collaboration with the State Bank of Pakistan (SBP), under which cash deposits or withdrawals exceeding Rs30 million annually will be flagged. If the income declared does not match the transactions, the individuals will face legal consequences.
Establishing Super LTUs and Expanding Enforcement
A key aspect of the transformation plan is the establishment of a Super LTU in Karachi, which will serve as a model for similar units in Lahore and Islamabad. These units will be tasked with overseeing tax compliance among the country’s largest taxpayers. Officers working in these units will be rewarded with additional salaries based on performance, incentivizing them to meet quarterly targets.
In a detailed presentation to Prime Minister Shehbaz Sharif, FBR Chairman Rashid Mahmood Langrial highlighted the alarming tax gap in Pakistan. Of the 67 million employed individuals in Pakistan’s population of 236 million, only 2.7 million are registered tax filers. Among these, 30% to 40% report annual incomes of Rs650,000, indicating widespread suppression of actual earnings.
Challenges Ahead
Independent tax experts have lauded the government’s ambitious plan but warned that successful implementation will require strong political will. Despite raising tax rates and removing exemptions, Pakistan’s real tax collection has remained stagnant at Rs3.1 trillion since 2016, underscoring the need for more effective enforcement and compliance.
Boosting Foreign Investment
In a related development, the Board of Investment and Chinese textile firm RUYI Shangdong signed a memorandum of understanding (MoU) for the establishment of international-standard textile parks in Pakistan. This initiative, witnessed by Prime Minister Shehbaz Sharif, aims to boost textile exports to $5 billion and create 0.5 million jobs. The textile parks will be developed in Sindh and Punjab, with the goal of attracting investment from 100 Chinese firms.
Conclusion
Prime Minister Shehbaz Sharif’s approval of the FBR’s transformation plan marks a significant step in Pakistan’s efforts to increase tax compliance, particularly among its wealthiest citizens. While the plan is ambitious, its success will depend on the government’s ability to enforce the new measures and foster a culture of accountability in the tax system.
